Kamada: CIA Japan (A).Takeshi Kamada, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest

$5,050,000

or its yen equivalent, in a covered interest arbitrage between U.S. dollars and Japanese yen. He faced the following exchange rate and interest rate quotes. Is CIA profit possible? If so, how?

Arbitrage funds available	$	5,050,000
Spot rate (/$)		118.54
180-day forward rate (/$)		117.86
U.S. dollar annual interest rate		4.808	%
Japanese yen annual interest rate		3.391	%

Question content area bottom

Part 1

The CIA profit potential is

negative 0.2630.263%,

which tells Takeshi Kamada that he should borrow

the Japanese yen

and invest in the higher yielding currency,

the U.S.dollar

,

to lock in a covered interest arbitrage (CIA) profit.(Round to three decimal places and select from the drop-down menus.)

Part 2

Takeshi Kamada generates a CIA profit of

enter your response here

by investing in the

higher

interest rate currency, the

dollar

,

and simultaneously selling the

dollar

proceeds forward into

yen

at a forward premium which does not completely negate the interest differential.(Round to two decimal places and select from the drop-down menus.)